Good day, ladies and gentlemen. Thank you very much for your patience and welcome to the third quarter 2007 Walt Disney earnings conference call. (Operator Instructions) I would now like to turn the call over to Mr. Lowell Singer, Senior Vice President of Investor Relations.

Lowell Singer

Thanks, operator. Good afternoon, everyone. Welcome to our third quarter 2007 call. Joining me today in Burbank are Bob Iger, Disney's President and CEO; and Tom Staggs, SEVP and CFO.

Two press releases are now available on our website, our Q3 earnings release and a release announcing our acquisition of Club Penguin. This call will be webcast from our investor relations website. After the call, we will post a replay and a written transcript of today's remarks.

Bob is going to lead off, followed by Tom. We will then open it up to Q&A and then I will return for some important Safe Harbor comments. With that said, let me turn it over to Bob.

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Thanks, Lowell. Look forward to those important comments. Good afternoon, everyone. After a terrific 2006 performance and excellent first quarter results, I'm pleased to report we have had another solid quarter, posting double-digit increases in segment operating income and earnings per share from continuing operations. We have again achieved a strong record by focusing on doing what we do best: that's building high quality, creative franchises across multiple platforms and multiple markets. A consistent strategic vision, a skillful, well-coordinated management team and a commitment to financial discipline are the key elements of our success, while creativity and innovation remain at the heart of everything we do.

Today we announced that Disney has acquired Club Penguin, as Lowell mentioned. This is one of the fastest-growing online virtual worlds for kids. We believe that Club Penguin embodies values of the utmost importance to Disney: that is providing high-quality family entertainment and fostering parental trust. This is thoroughly consistent with our strategic vision. Club Penguin is a great example of creativity and technology merging, resulting in an engaging, entertaining and immersive environment for its users. Just as with our Disney.com, kids love Club Penguin and parents trust it.

In less than two years, Club Penguin has grown into a site that boasts more than 12 million activated users and 700,000 paying subscribers. Imagine how Disney's marketing skills and worldwide technological capabilities can contribute to Club Penguin's growth, and you can see why we are so enthusiastic about this acquisition. We are pleased that Club Penguin founders Lane Merrifield, Dave Krysko and Lance Priebe are joining Disney. They have done a fantastic job of building their business in a short period of time with great creativity and innovation, and we look forward to working with them.

Disney's technological know-how, online capabilities and international reach will support global expansion of the Club Penguin franchise. We plan to rename it Disney's Club Penguin and to immediately use our Disney branded properties such as Disney.com, Disney Channel, Radio Disney and our parks and resorts to raise its profiles. For those of you who are on your computers, you can log on to Disney.com and see what I mean.

Earlier this year at the consumer electronics show we announced we were embarking on the creation of a number of virtual online worlds through our new Disney.com web site where kids and families can have compelling, immersive experiences. Our vision has been to create online destinations where kids around the world can interact with each other and play games along side their favorite Disney characters. Combining the creativity and knowledge of the Club Penguin team with our existing Disney online assets, including the number one web site for kids and families, Disney.com, will help us to further our objective of establishing clear global leadership and the development of virtual online worlds for families and kids.

We believe virtual worlds can extend and expand on the life of a franchise, expand our global reach for our entertainment content, and allow us direct contact with our consumers in a more personalized and engaging way. All aspects of our strategy hinge on our ability to create compelling content, and I'm happy to say that Disney remains on a creative roll.

In the midst of perhaps the most competitive summer ever for movies with one blockbuster opening after another, we are pleased with the performance of our third quarter releases, Pirates of the Caribbean, at World’s End and Ratatouille. Pirates is the number one movie of the year globally, with worldwide box office revenues to-date of over $950 million, making it the fifth-highest grossing movie of all time. Ratatouille, the best-reviewed movie of the year, is on track to see over $200 million in domestic box office, and is just now beginning its broad international rollout. We expect Pirates and Ratatouille to do well during the holiday season when they are released on DVD, iTunes and soon after on Video-on-Demand.

At our cable networks, Disney Channel remains a creative powerhouse that continues to maintain its leadership with 6 to 14-year-olds while capturing its largest ever share of the preschool audience. We expect this position to be reinforced later this month when High School Musical 2 premieres, raising to a whole new level an entertainment phenomenon that's come to define the virtues of our multi-platform, multi-market approach.

So far, High School Musical has been seen by over 160 million viewers worldwide. Global soundtrack sales now top 7 million, while 7.8 million DVDs and 4.5 million books have been purchased by consumers, and some 2,000 licensed products are underway in schools and community theaters. High School Musical 2 is also a launching pad for a back-to-school merchandising campaign, and our biggest ever sales program with Wal-Mart stores.

The creative strength of our studio and networks is bolstering the performance of our businesses in many different ways. Miley Cyrus, the star of Disney Channel’s Hannah Montana is the youngest artist ever to have two Billboard number one records in one year, both of course, on Walt Disney Records.

The newly christened Finding Nemo Submarine Voyage at Disneyland is drawing huge crowds and highlights again the strength and value of Pixar’s creativity, especially in combination with Walt Disney Imagineering.

We are also very excited about the ABC Network fall season where a strong slate of new shows will join hits like Grey’s Anatomy, Dancing With the Stars, Ugly Betty and Desperate Housewives. ABC’s performance during the recent upfront reinforces the value of our broadcast networks as an effective platform for advertisers to reach a mass audience with attractive demographics. We achieved high single-digit CPM increases at the network and booked over $2.4 billion in total primetime commitments.

Once again, ESPN had a great quarter, leading results at our cable networks. ESPN is an exceptionally well-positioned brand that crosses multiple media platforms and is expanding both its business lines and its international presence. Looking ahead, we believe ESPN will continue to be an important driver of growth for Disney in the years to come.

A commitment to great, high quality creative work, a persistent focus on new technologies and intelligence investment in international markets are the strategies we believe can continue to carry us forward. We have a strong balance sheet, incredible assets and a disciplined approach to new investment, favoring those areas that enhance our key brands and provide the best return on capital.

We believe our business model is proving flexible enough to adapt to fast-changing markets and consumer preferences, all the while enhancing long-term shareholder value.

With that, I will turn it over to Tom Staggs.

Tom Staggs

Thank you, Bob. Good afternoon, everyone. We are now three-quarters of the way through our 2007 fiscal year and I am happy to note that we are well on our way to delivering yet another year of double-digit earnings growth. At Media Networks, the strong results we have seen all year continued in the third quarter. Broadcasting revenues were up due to international sales of Lost, desperate Housewives and Ugly Betty, along with higher domestic syndication and home video sales. The network also reported higher advertising revenue for the quarter.

Fewer pilots and lower production expense at ABC Studios helped push broadcast operating income to more than double the prior year quarter. These gains were partially offset by increased spending on our digital initiatives including Disney Mobile. ABC's softer ratings in the quarter were more than made up for by strong advertising sales and CPMs in Q3 were up double-digit percentages versus last year's upfront.

At cable networks, ESPN delivered higher affiliate revenue, even though we recognized $57 million less in deferred revenues this quarter than we did in Q3 of last year. In the fourth quarter we expect to recognize all of the ESPN's remained deferred affiliate revenues for the year, which amounts to a little over $185 million more in deferred revenue recognition than we recorded in last year's Q4.

Advertising revenues for ESPN came in on par with the prior year quarter, despite difficult programming comparisons including fewer Major League Baseball games and lower ratings of the NBA playoffs.

Looking ahead, we are extremely excited to have NASCAR back on our networks this year and last Sunday's All State 400 at the Brickyard performed well on ESPN, delivering a 4.9 rating among total cable households. Given the timing of our races, we will book roughly 60% of our NASCAR rights cost for first season in this fiscal year, with a great majority of those costs coming in Q4. Disney ABC Cable Networks also contributed to this quarter’s growth, through increases in both advertising and affiliate revenue, especially at ABC Family.

At Parks and Resorts we delivered solid revenue and income growth, as well as improved margins. Our parks and resorts have a unique advantage in terms of their scale and their ability to leverage our stories and characters to create an immersive experience for our guests. We continue to capitalize on those strengths through marketing, pricing and guest service campaigns, such as Year of a Million Dreams, Magic Your Way and Disney's Magical Express to drive increases in guest spending and hotel occupancy.

Walt Disney world attendance increased by 4%, growth primarily led by increases from domestic visitors. Per capita spending came in slightly higher than last year. Our Florida hotels also performed well, with occupancy just above last year at 93% and per room spending up 5%.

Disneyland Resort comparisons are challenging this year, given the successful 50th Anniversary celebration last year. Despite this tough comp, attendance was roughly the same as in Q3 of last year, while guest spending was up by low single-digits at the Disneyland Resort. Our West Coast hotels’ performance was very strong as well. Occupancies came in at 96%, which is in line with last year and per room spending increased by 9%. Looking ahead to Q4, combined domestic attendance trends so far are roughly flat with the prior year but room reservations for the quarter are currently pacing low double-digit percentages ahead of last year’s Q4.

At Disneyland Paris, Q3 attendance increased 9%. The trends there continue to be strong. With regard to Hong Kong Disneyland, we have discussed that attendance to date has fallen short of what we would like and that we expect to invest further in Hong Kong Disneyland’s marketing and attractions to help ensure its long-term success.

The Studios creative success over the past couple of years has been spectacular, and that success is evidenced in year-to-date results for this segment. In Q3, our box office success continued, driven by the strong worldwide performance of Pirates of the Caribbean, at World’s End and the opening of Ratatouille. The difference this quarter, however, was in home video, where last year’s release of the Chronicles of Narnia sold over 18 million units with no comparable release in this year's Q3.

The segment's operating performance was also affected by the timing of the marketing spend for Ratatouille, which premiered domestically at the very end of the quarter. As Bob mentioned, Ratatouille has been well received and we will continue to roll out the movie in additional markets around the world throughout the summer and fall.

With that said, it's worth noting that in Q4, the studio will face comparisons of the worldwide theatrical release of Pirates of the Caribbean 2, which went on to become the third most successful film in box office history.

Consumer products continued to perform very well this last quarter. Consumer products revenue growth of 23% outpaced operating income, primarily due to the fact that the large portion of the revenue growth was driven by our self-published video games, led by Pirates 3. We are encouraged by the success thus far in this business, but as we continue to ramp up our investment in video games, these efforts will continue to dampen margins for Consumer Products in the near term. In addition, the absence of US Weekly which we sold at the beginning of year dampened year-over-year margin comparisons for the quarter by roughly 1.5 percentage points.

In licensing, Cars products continue to perform extremely well, further solidifying our belief in the long-term strength and value of this new franchise.

As we have said in the past, our first priority for incremental capital investment is strategically attractive opportunities for growth that we believe can generate strong returns for our shareholders. The Club Penguin acquisition we just announced is completely consistent with this approach. From its launch in October of 2005 through the end of calendar 2006, Club Penguin grew paid subs to 400,000. Since the beginning of calendar 2007, Club Penguin has increased this figure by more than 300,000 and paid subs now stand at more than 700,000. We believe that figure can continue to grow.

We are making an upfront payment of approximately $350 million for Club Penguin, with a potential for additional purchase price payments of as much as $350 million through the end of calendar 2009, depending on the growth of Club Penguin’s earnings. Although there is obviously the potential for significant future payments, the deal is structured such that the value creation opportunity from this acquisition is greater as the payments increase. We expect the deal to be accretive to our earnings in year one and more accretive if we achieve the higher earnings levels that would result in increased payments under the earn out.

Our strong balance sheet and free cash flow provide us with the financial flexibility to capitalize on acquisitions like Club Penguin and other investment opportunities as they arise. At the same time, we continue to return capital to our investors through both dividends and share repurchase. During the third quarter, we repurchased approximately 55 million Disney shares for approximately $1.9 billion. Taking into account the shares we purchased since the end of the quarter, we have bought a total of nearly 180 million shares this fiscal year at a cost of just under $6.2 billion.

We are pleased with the trends we are seeing across the company as each of our businesses is executing well against our strategic priorities. These priorities include our commitment to developing quality content that strengthens consumers relationships with our brands, and our ability to leverage creative success across the scope of our businesses. The result has been the strong earnings growth, cash flow and improving capital returns we have been achieving. At the same time, we have nurtured and extended the competitive advantages that can help us deliver increasing value for our shareholders in the future.

With that, I will turn the call back over to Lowell for Q&A.

Lowell Singer

Operator, we are ready to begin the question-and-answer portion.

Question-and-Answer Session

(Operator Instructions) Our first question comes from the line of Anthony Noto - Goldman Sachs.

Anthony Noto - Goldman Sachs

Thank you very much. Two questions, the first is on ESPN, Tom, did you recognize less of the revenue deferral in the quarter than you anticipated? And if so, could you quantify how much? We thought it would be about $150 million. It looks like the fourth quarter is going to be almost $200 million more than we thought.

A second question, Bob, on Club Penguin, if I do the quick math based on the price point available on the site and what I'm currently paying, it looks like their revenue run rate is about $50 million. Does your assumption for accretion assume that just the current business drives the economics? Or does it also assume some additional opportunity of building the Club Penguin brand in different media venues such as shows on Disney Channel or other media properties outside of online? Thanks.

Bob Iger

With regard to the ESPN revenue deferral, the structure of the agreements are such that the programming commitments are met around this time of year. There's a decent amount of swing in what amount of revenues we would recognize in the third quarter.

If I was handicapping it as we went into the quarter, I would say that I would lean towards it being slightly more recognition than we saw, but we also knew that there was a potential for that swing.

Tom Staggs

To the second part of your question, Anthony, as a standalone business given where it is today, Club Penguin would be modestly accretive in year one for the company. When we ran the economics on a long-term basis, we are basing most of them on our ability to grow that business unto itself; meaning growing subscribers for Club Penguin, not just in the United States, but globally. We will see opportunities to exploit Club Penguin on other properties. Most of what we do there will be to market Club Penguin and to grow the core business, but there may be some other additional revenue-generating opportunities beyond just the ability to market. So video games might be a prime example, some other forms of consumer products, possibly some presence in it our theme parks and clearly some opportunities on our media networks.

But when we look at the economics again from a standalone perspective, it's accretive in year one and most of what we will be focused on will be growing their core business.

Operator

Your next question comes from Imran Khan - JP Morgan.

Imran Khan - JP Morgan

I think if you look at your growth in the park business, it was quite a bit driven by the average spending per capita. I was trying to understand what kind of opportunities do you see to grow it forward from here?

Secondly, in the calendar fourth quarter or your fiscal first quarter, can you give us some sense when we should expect to see the three-disc DVD for Pirates and give us some color on that? Thank you.

Tom Staggs

With regard to parks per capita spending, we said in the past that our expectation is that the parks pricing will generally track inflation and generally we look at the leisure index to get a sense of what inflation is in that business, and we have tracked that pretty close in the past. I think it will probably be a reasonable thing to look at in the future.

So this last quarter, as an example, we saw roughly the same percentage increase from admissions per capita as we did from food and beverage, so we are seeing the strength not just in admissions but also what people are doing inside our parks. So we are pleased with that as we broaden the activities for people, we hope to capture a share portion of their vacation wallet. That's part of the strategy that Jay and his team are pushing for.

Bob Iger

The second part of your question, Imran, the Pirates 3 DVD will be available as a Christmas or holiday title. We have not announced a date for when a three movie Pirates DVD package will be on the market place, but clearly it is something we intend to do and I think you can expect to see it as a Blu-ray disk as well, but no date specific.

Operator

Your next question comes from Jessica Reif-Cohen - Merrill Lynch.

Jessica Reif-Cohen - Merrill Lynch

Thanks. This is an amazing acquisition. I just wonder how will the management of Club Penguin be integrated in Disney's Internet operations? Is this something that you would see Pixar management involvement in Disney Animation?

Completely separate on the upfront, can you comment on how the cable networks did and also in broadcasting, the other non-primetime day parts?

Bob Iger

Thank you for your compliments on the Club Penguin acquisition. The Club Penguin team will report directly to Steve Wadsworth who is with us today and the Internet group. Their focus, certainly in the near term, is going to be on growing their business, not just domestically but on a global basis. It is aided considerably by Disney's infrastructure, both in that space and in other businesses.

We believe that bringing them on board will give us additional expertise creatively, technologically and just in terms of their experience to date, as we seek to grow our virtual worlds online more aggressively, which as you know we have been up to.

So this is a great addition to the team. While it's not thoroughly analogous or completely analogous to the Pixar situation, I guess there are elements to it that are similar in that we are bringing expertise into a company in a space that we value greatly that we believe will provide the company with great growth. That clearly is a significant part of the value that we're buying in buying Club Penguin.

They will continue to be located in British Columbia. We hope that they will spend more time down here at Disney for the reasons I just cited, but the business will remain where it is and as I said, reporting into Steve Wadsworth.

On the upfront side, we had a strong upfront in multiple day parts at the network. Double digit CPM increases in morning news and in daytime, for instance and so in general, it was a solid upfront for ABC. On the cable network side, we have not been too specific, but both ESPN and ABC family had excellent upfronts. ABC family was up double-digit from a CPM standpoint and ESPN also had a very strong upfront, particularly against certain properties like Monday Night Football and NASCAR.

Tom Staggs

And ABC Family and Soap Net also had strong upfronts. It was pretty much strong across the board.

Operator

Your next question comes from Michael Nathanson - Sanford Bernstein.

Michael Nathanson - Sanford Bernstein

Tom, looking at your parks reconciliation that you always post, it looks like the royalty fee this quarter was very low, like $6 million. Why was that and when does the park royalty rate step up? What is going on in that? Then I have one for Bob.

Tom Staggs

Well, the answer to the first question is that the royalty rate, as you do a quarter-over-quarter comparison, as you may recall when we did the last year of Disney restructuring, we provided for the deferral of royalties at Euro Disney, and because we do have the revenue deferral, they are pushed out to a later time. They are essentially turned into a debt obligation so we don't recognize the deferral through the income statement until it's appropriate to do so. So that's the primary difference between those two figures.

Michael Nathanson - Sanford Bernstein

The second is for you, Bob. When you look at all of your divisions, they are all operating well. The question I have is when you look at your portfolio of assets, which divisions or assets do you think have the best ability to raise margins in the company in a couple of years? Where do you think you have the best chance to lift margins? Which division?

Bob Iger

Well, we are working hard at margin growth, obviously in all of our businesses. We are pleased that the theme parks are essentially at the 20% margin that we talked about being the magical number. We prefer not to stop there.

ESPN obviously is substantial margins but as their sub fees moderate, it will be hard to grow their margins over the long term, even though ESPN will continue to deliver significant growth to the company. Even though their sub fees are starting to moderate a bit, they are coming off of a relatively high base.

We continue to look at growing our margins on the licensing side at Consumer Products. We have done a good job with that in the near term in the recent past. We are going to do some investing to grow licensing in general in Consumer Products which may not give us the ability in the near term to raise margins but the goal long term is to do just that.

Media networks in general, meaning other businesses in broadcasting, has always, as you know because it's a single revenue stream business, is always from a margin perspective dependent upon both the rating delivery and the market place. At least for now we are experiencing positive signs in both fronts.

Tom Staggs

I think I would add to it that as Bob alluded, there are a number of places where we are currently investing. In Consumer Products, Bob talked about our licensing capabilities. And as we noted in recent quarters, we have been seeing double-digit type increases in our earned royalties and that's really a direct result of the investment in those capabilities, both in terms of direct to retail and in terms of product categories.

We expect that investment to continue for the next couple of years and during that period of time, it may dampen margins; but the margin impact as you get beyond that and the growth, we think can be substantial. So that we are doing. As well in Consumer Products the investment of video games I mentioned in my prepared remarks, right now that dampens margins. To the extent we continue our success there, as you get out into steady state, you will see margin growth come from that as well.

The final thing I would mention is that we are investing, as you know, considerably in our digital initiatives. The Internet group in particular and as those initiatives mature, I think you will start to see that turn in terms of being a margin contributor as opposed to the opposite that we are experiencing now.

Club Penguin by the way is a nice exception, it actually has a nice margin already and it is a business that obviously we hope to grow it further.

Operator

Your next question comes from Doug Mitchelson - Deutsche Bank.

Doug Mitchelson - Deutsche Bank

Thanks very much. Also one for Tom and one for Bob. Tom, your comments that you are well on your way to double-digit EPS growth is oddly reminiscence of guidance. I was curious if you want to take a shot at whether you will see such growth continue in fiscal '08?

Bob, I guess the real question, I want to see if you felt the Pixar deal is tracking in line with your acquisition budgets, given Ratatouille, despite its critical success, is performing domestically a bit below the prior Pixar films? Thanks.

Tom Staggs

Well, you know, I'm sorry if it felt like that. I didn't mean to tease you. But at the end of the day, with EPS growth as substantial as it was in the first fine months, I felt it was reasonably obvious that we could probably achieve double-digit this year. With that, I would demure on talking specifically about '08 guidance. As you know, that's not something that we engage in.

Bob Iger

To your question about Pixar. First of all, when we evaluated the acquisition, we looked at their titles on a global basis, not just on a domestic basis and we think Ratatouille will be an extremely successful global property. We also believe that these are long-term products, meaning they will deliver value for the company for a long period of time. What we have learned, when you put the Pixar name or the Disney name on a high quality animated feature, it delivers results or shareholder value for decades to come. Witness how we did recently with bringing Peter Pan out into the marketplace or Little Mermaid. We think Ratatouille, because it is the best reviewed film of the year, and it is as good as it is, will drive that kind of long-term value.

We bought Pixar for multiple reasons. We clearly knew we wanted to bolster our animation efforts, which are critical to the company, but they also brought to the company quality and creativity and a significant amount of technological innovation. When we valued it, we clearly looked at the potential at the box office for the upcoming titles. We also looked at the potential at the box office for the Disney titles that Pixar management and creativity would deliver. We looked at all the other variables, like the long-term impact on high quality of the company, creativity in bringing their great technological experience to us.

So we really believe that Ratatouille ends up hitting the $200 million plus number that I mentioned in my remarks domestically and it does well internationally, which we are optimistic about, we've got a good solid title for the Walt Disney Company from a value perspective for many, many years to come.

Operator

Your next question comes from Spencer Wang - Bear Stearns.

Spencer Wang - Bear Stearns

First on the broadcasting side, through the first nine months you have seen pretty good margin improvement. The revenues are flattish and costs are actually down 6%. How sustainable heading into '08 is it to continue to keep costs on a decline or should we expect some sort of reversion to the mean on the cost side?

Secondly Tom, can you give us a sense of how big the deposit was for the two cruise ships and how the payment schedule will work for the two ships?

Tom Staggs

Sure. With regard to broadcasting, as we have discussed in past for the prime time schedule at ABC this year, we ended up with an average cost per entertainment hour that was down somewhat versus the prior year and so that showed up in the results.

The important issue with regard to margins going forward is not so much the fourth quarter where the same programming cost dynamics are really in play, but it's really where we go with the new primetime schedule, et cetera. So we've got some hit shows that are returning. The costs will increase somewhat on those shows, as you would expect. I am not sure what reversion of the mean in payables but the bottom line is that our broadcasting group has been doing a very nice job of managing down their programming costs, even as they have gotten success. Those efforts are definitely going to continue and we will squeeze as much margin out of broadcasting as we can.

With regard to the cruise ships, the vast majority of the purchasing price of the cruise ships is back end loaded. That is the delivery of the ships. The deposit you would measure in tens of millions, not hundreds of millions and the biggest portion of the expenditure from that is yet to come in 2011 when the ships start to get delivered.

Operator

Your next question comes from Gordon Hodge - Thomas Weisel Partners.

Gordon Hodge - Thomas Weisel Partners

Yes, good afternoon. Just a quick question on Club Penguin, which I am pretty familiar with at home. It sounds like there's a lot of user-generated content involved there and as a result I gather it has a very high margin. I think you alluded to it being a high margin, but just trying to get a little bit more on the profitability there.

Also another question on the parks. I think you had a pension liability benefit this year and I'm just curious if you can give us a sense of what that might be going forward? Thanks.

Bob Iger

Gordon, we are not going to get specific on the margins of Club Penguin, except to say that they are significant, which obviously is one of the reasons why we believed that the asset was attractive. You talked about user-generated content. It's not all user-generated. Club Penguin does, in effect, create the framework for people to experience the online world. Kids have essentially their own experiences using their Avatars and you can buy igloos and furnish them, et cetera and so on, buy clothing. I guess to some extent it is mildly user generated.

But we really believe that the essence of Club Penguin is that it's simple, meaning it's easy to use. It doesn't require a significant amount of what I will call technological investment; it does require a significant amount of creativity, though. Keeping this fresh and innovative and essentially keeping the experience fresh for kids is something that we view as critically important to the long-term success of this property and it's one of the most attractive things we saw in it, in that the talented people who have created this and have been running it have been diffusing it with a fair amount of new creativity.

Again, we are fortunate. It's creativity that doesn't necessarily cost that much money but it is extremely vital and important.

Tom Staggs

With regard to pension and post-retirement medical costs, you are right. The theme parks had a benefit of about $125 million this year on an apples-to-apples, year-over-year basis. That was driven predominantly by a change in the market rate of interest at the time that the pension calculations have to be done, so that sort of dictated to us in terms of the methodology there.

As we look forward to this year, I don’t see the same sort of year-over-year change in where interest rates are from the two measurement periods, and so I don't expect a similar dynamic to be in play next year.

Gordon Hodge - Thomas Weisel

But you don't foresee it reversing the other way, it sounds like.

Tom Staggs

I don't expect it to be dramatically different one direction or the other.

Operator

Your next question comes from Michael Morris - UBS.

Michael Morris - UBS

You noted international programming is bolstering your broadcasting segment this quarter. Can you give us some color on the magnitude of that contribution? Also the penetration, when you look at the global marketplace, how penetrated your product is and how much opportunity there is for growth there?

Secondly on the video game side, you have made a number of small acquisitions recently. Do you feel that the infrastructure that you have now is sufficient to monetize your properties or would you consider perhaps more sizable acquisitions to participate in this high growth business? Thank you.

Tom Staggs

Well, with regard to international sales of our television product, and really Desperate Housewives, Lost and Ugly Betty have been extremely well received in the international markets, and Grey's Anatomy as well although that was actually earlier in the year. But the order of magnitude there, it was one of the key drivers of the profit growth in the business, but that is to say I think that there's still growth in international markets to come. I think there's more penetration. The real driver of course, is going to be the continued success of the shows and so finding new hits and having those shows continue to succeed I think is going to be the biggest determinant of where that number goes from here.

Bob Iger

The other thing that we have seen in terms of international television is significant growth in international home video for television properties. So not only have these TV shows done well on the platforms that they are airing on, largely terrestrial platforms around the world, but our home video unit has done a great job at selling them in DVD form in markets all over the world. That's been really interesting in terms of growth potential. It clearly supports the investment we have made in these properties.

On the video game side, we are comfortable with where we are from an infrastructure perspective, meaning the investments we made to-date, mostly in development talent, give us the ability to develop and create enough titles to grow the business nicely without putting more money at risk than we feel is appropriate or prudent.

We have looked, as we do in a number of businesses, at acquisition opportunities but as is typically the case, we don't comment on such things. We will continue to do so, but that shouldn't in any way suggest that we feel the need to acquire in that space in order to grow in that space.

Operator

Your next question comes from David Miller - SMH Capital.

David Miller - SMH Capital

Congratulations on the solid results. Bob, we noticed that with the European release of Ratatouille the release by country is somewhat staggered. In fact, I don't think the film is set to be even released in some of the top 5 markets in terms of screen count until the fall.

I think you have Italy on October 19th, the UK on October 5, Germany is October 3. Those are all top 5 market in terms of screen count. Other than the overall competitive situation with flows of product out of the U.S. into the European marketplace, is there any other reason for that?

Bob Iger

No, you hit it on the head, Dave. We are staying out of the way of some significant competition. You wouldn't want to compete against Harry Potter, as a for instance in the U.K. We stayed out of the way of Shrek and some of those other really big titles. We do open in a number of key markets this coming week. It's opening in France as a for instance. But the rollout is what I will call staggered for the reason that you cited, to basically create a competitive environment that we feel is healthy for the film.

Consumer products, how should we think about it going forward? Obviously had tremendous strength out of Cars; Ratatouille, perhaps not the same type of strength but is the licensing business strong enough as we go out?

Tom Staggs

By the way, Jonathan, I understand you had a baby. Congratulations.

Jonathan Jacoby – Banc of America Securities

Thank you.

Tom Staggs

We will have to make sure that they get enlisted in Club Penguin.

The Consumer Products revenues from Cars is really kind of a phenomenon. It's our most successful new animated film franchise since the Lion King. So any film that we would release in the last ten years would pale in comparison to where Cars has been. We are obviously thrilled with that and hope to see Cars continue.

Ratatouille has a more limited consumer products program, as you might imagine. At the same time, the most important thing to think about in our Consumer Products business, especially when it comes to licensing is that we have an unbelievably broad base of properties to draw from in growing that business. Andy Mooney and his team have done a good job of diversifying our business base across character franchises. You saw the great growth of Princess, the Fairies franchise is coming along well, Cars of course, has come on strong, Pirates of the Caribbean.

I don't know of any other company that has such a strong group of properties to draw from. As we invest in our capabilities over there, I think if you looked out in the long term, there is really strong growth potential for Consumer Products. That growth potential is around the world.

Bob Iger

Tom, just to add to that, you mentioned diversifying our properties. We have diversified well beyond motion picture merchandise. With Disney Channel's success it has driven a lot of success for Consumer Products. We talk about High School Musical there's been a really strong program at retail. I mentioned that we have a back-to-school program at Wal-Mart that coincides with High School Musical 2 that is the biggest we have ever seen. We also have Hannah Montana and other Disney Channel properties.

The other thing we have done in the last two years is we brought back new versions of Mickey Mouse, in this case Mickey Mouse Clubhouse and Winnie the Pooh. Both are doing quite well in the preschool space and while both are designed to succeed on their own as programs on the channel and on international channels, they are clearly designed to help support two of Consumer Products’ most valuable franchises, and that is Mickey Mouse and core characters, and Winnie the Pooh.

Operator

Your next question comes from Tuna Amobi - Standard & Poor's.

Tuna Amobi - Standard & Poor’s

Bob, given the nice publicity that was garnered by Secret of the Magic Gourd, I was wondering if that changes your philosophy in terms of the Disney branded local movies and if perhaps you can speak to the economics of those kind of productions?

Tom, if I heard you correctly it seems like there is potentially a huge disconnect in domestic parks between the attendance and the room reservations. If you can explain a little bit more about those dynamics, because I don't remember the last time I saw this type of variation.

Bob Iger

Tuna, The Secret of the Magic Gourd which we released in China in July is actually the result of a strategy and a philosophy that we have about growing the company internationally. We believe that investing in Disney-branded local content is a very, very smart thing for us to do, as we seek too drive long-term growth outside of the United States. It's really important for us to be competitive locally and to do so, you have to put out product that is made in the marketplace, that is indigenous to those marketplaces.

Magic Gourd is really the first of what we hope to be the many such properties, both on the movie side and ultimately on the TV side. We are investing to make Disney-branded films in China beyond Magic Gourd; in India we announced a deal with Yash Raj films just a month ago, or in June actually, to make animated films in India. We believe we have opportunities in Russia. We have been doing a fair amount of investing in Latin America to make original Disney product. We're doing a number of things from a television perspective under the Disney Channel umbrella, along the same lines.

Again, a good way we believe to deploy our capital, Disney-branded; from an economic perspective, the cost of making this product in these markets, as you would expect, is substantially lower than what it would cost us to make similar product in the United States. Magic Gourd cost somewhere in the neighborhood of $5 million, as an example. It would be nice to make movies for that price in the United States, but I don't think I will see that during my lifetime.

Tom Staggs

Tuna, as you pointed out we are seeing very strong bookings. Low double-digits ahead of the prior year, but I mentioned the attendance quarter to-date has been flat with the prior year. The biggest factor there, remember we are only a month into the quarter, but the biggest factor there really looks to have been the Fourth of July week, we had Fourth of July in the middle of week and that actually seemed to have a bigger impact than I would expected. Remember, we are comping against very strong attendance results in the prior year. July is a strong month every year. That impact itself we saw in the numbers. But as we look ahead, the bookings look strong and so we feel good about where the parks stand.

Operator

Your next question comes from Anthony DiClemente - Lehman Brothers.

Anthony DiClemente - Lehman Brothers

In the past, I think investors have looked at Disney as a cyclical stock at times which is pretty tied directly to the U.S. economy and economic cycle, with the macro economic indicators that people have been focused on in the past couple of weeks, such as oil prices and the wealth effect. What is the strongest evidence now that you can see in your business, either over the past year or most recently that would suggest that assumption about Disney as a cyclical company is no longer the case? Thanks.

Bob Iger

Well, most of our businesses typically do not rise and fall with the cyclicality of the market place. People still go to movies during good times and bad. Television remains popular. Use of the Internet continues to grow in a market place where there is some uncertainty. The only business where we have tended to see some fluctuation is in travel and tourism, which affects our theme parks. But by and large, that business has not been impacted by increases in oil or gasoline prices during good times and bad, and it doesn't seem like there's a direct correlation.

There typically has been a direct correlation between our theme park business and consumer confidence but that correlation has been broken over the last few years. Although we certainly would prefer consumer confidence to be up, which it was this week. We think that is a good sign. What had been a fairly consistent pattern of our parks and resorts business rising and falling with consumer confidence has not been as much the case over the last couple of years.

So for the most part, interestingly enough, we don't see our company as affected by the cyclicality that you cite. Maybe other people believe that we are. In general, the trends that we have seen in our theme parks have been quite positive and do not seem to have been affected. Clearly there are other situations in the world that have had an impact, like 9/11 back in 2001. There are some difficulties in traveling to the United States that we see today; tougher to get a visa, as a for instance. Just generally more difficult to travel internationally than it was. That has some effect, but in general, the businesses have not been as affected in effect by the overall market places as certain people expect.

Tom Staggs

Anthony, I would make a couple of observations on top of that. That is as Bob said, the theme parks tended to rise and fall with the consumer confidence and spending and the wealth effect, et cetera. We're not saying that they are detached from that cycle but our businesses don't necessarily run in the same cycles. They can be countercyclical to one another.

I think one of the things that has happened in the past is that at certain points in time, we were perhaps in a down cycle in certain businesses like theme parks at the same time that we actually had a down cycle in some of our creative efforts. I think that has caused people to overestimate the degree to which the whole company is cyclical.

It's also one of the reasons that Bob and I have talked about the investments we are making in the creative processes of the company and making sure that creatively, the company is as healthy as it possibly can be, and that the creative strength is broad based and diversified across a number of businesses. That for us is a big focus as a management team.

We also try to make sure that we are as nimble as we can be on the cost side to the extent that we see downturns in businesses and we learned a lot about that over the last five years or so. So we don't pretend to be immune from individual cycles but there are a number of cycles at work in the company at any point in time.

Bob Iger

The other thing that we have done, and the parks and resort team deserves a lot of credit for this, is they have gotten far more strategic from a pricing perspective, and they are reaching out in terms of their pricing efforts to a much broader demographic and so the $1,500 family of four package to Walt Disney World as a for instance is one example of that, just simply making the park more affordable or the resort more affordable to more people.

Having a pricing strategy that enables people to spend more time at the parks, in effect, the more you stay, the more you play, the less you pay, I guess is the way we put it. That has worked really well as well. It sort of breaks the correlation a bit; it makes us less susceptible.

Operator

Your next question comes from Jason Bazinet - Citigroup.

Jason Bazinet - Citigroup

Thank you very much. Two strategic questions on ABC. Mr. Iger, I think you have spoken in the past about focusing on three brands: ESPN, Disney and ABC. I understand ESPN is for men and Disney for kids. I was just wonder, are you maybe without explicitly saying it, positioning ABC as a female network given the strength of Grey's and Desperate Housewives and some of the pilots?

My follow-up question is maybe a little bit stranger. But given your strategy, which I think most people on The Street agree with of insuring that the content creators capture more value and by extension, people in the distribution business get less, and we see that with retransmission and day and date and Internet availability of your shows; is it totally outlandish for you to potentially migrate ABC to a cable network so you can get the equivalent of retransmission fees, given your small exposure to the TV station side? Thanks.

Bob Iger

Well, ABC is not purposefully positioning itself as a brand for women or female brand; although they have had great success in that direction led by the shows you mentioned, Desperate Housewives and Grey's Anatomy. It's not their intention to solely program in that direction or create a brand.

However, given the strength that their programs has in that direction, they have looked to develop more in that direction to take advantage of the audience they already have, whether it's audience flow or the marketing capabilities of shows that attract that audience provide. So we are not purposefully turning into a women's brand, but a lot of their programming is, in effect, geared to attract the women demographic.

On the second part of question, the one you deemed maybe a little bit more weird than the first one -- I don't know that it's necessarily weird, because that is in general a single revenue stream business, and then it has its challenges because of that. We have looked at a variety of different strategies when it comes to the network, and we will continue to, to basically figure out how to best operate that business going forward and more specifically, deliver long-term shareholder value.

The idea you referenced was to turn it into a cable network has come up at times, but the times that we have evaluated it, we concluded that it would not be in the best interest of the company to do so. The economics, actually would have been more strained than anything else. We will continue to look at the way that business is run. It is something that Anne Sweeney spends a fair amount of time on, whether it's on the cost side to Tom's point earlier about costs or to the other question, or on the revenue-generating side. But the idea that you mentioned is not something that we are considering.

Tom Staggs

You don't want to dismiss the strength of some of the local franchises that are represented by the affiliates and by our own stations. They actually have very strong in market franchises that I wouldn't dismiss too lightly in thinking about that equation.

Operator

Your final question comes from Rich Greenfield - Pali Capital.

Rich Greenfield - Pali Capital

When you look at your capital expenditures and your theme parks, you had talked about increased investment at your analyst meeting a few months ago, but your expense domestically was up about 20% after six months and up about 40% after the nine months. Just maybe looking for more color on where that capital specifically is going and how you see the early returns on some of the investment spending you have done so far this year at the theme parks domestically.

The question that was asked earlier in terms of how to leverage this whole Club Penguin theme. Do you think it's possible to create things like Club Mickey or Club Pooh and utilize some of your core characters to build out or create simultaneous worlds, similar to what MTV has tried in taking MTV Laguna Beach, The Hills, et cetera, to build off of great technology? Thanks very much.

Bob Iger

I will take question two. We actually do believe that we have ample opportunities to create virtual online worlds with multiple character sets. As I mentioned, and as you know, we have Pirates coming out later this year. We have Disney Fairies which is largely Tinkerbell derived which is already up and will expand in terms of what kids will be able to do. We have been talking a lot about the potential that Cars has online. Not only do we believe that it will live in that space nicely but it really will help keep the franchise vital, particularly when you consider the Consumer Products value as we talked about earlier.

As for Mickey core characters and Pooh, certainly there are opportunities there too. You have to look at the demographics. Pooh for instance, tends to be very young, and typically kids that go online and participate in or experience virtual worlds seem to be a little bit younger than the typical Pooh demographic, but we have Toontown right now where there are some of the Mickey and other Disney core characters present there.

This is a space that we think is only going to grow, and we believe that there's a huge value to existing franchises being in that space, but you can't just snap your fingers and get it done. You have to think through it very carefully. What Club Penguin has done is to design a great experience, one that kids can enjoy from the moment they go on the site; it is relatively easy to enter, easy to navigate. It's also very important that it is safe which we feel very strongly about, particularly when you apply the Disney brand to it. We will continue to invest in this direction, both in creating new characters and franchises for the space but also taking characters and franchises from other platforms and putting them in that space.

Tom Staggs

With regard to capital expenditures, the domestic parks are up about $150 million in spending year over year thus far and both from the standpoint of what happened in the quarter and for the nine months, the biggest year over year Delta is the deposit on the cruise ships that we talked about. While it's a relatively small percentage of the overall cost of the ship, it's meaningful in the context of the capital expenditures for the quarter.

But we are also investing in things like the submarine ride at Disneyland. We continue to put new guest offerings out there but we also think there's a real opportunity to put more of the Pixar properties into the parks. These are really well-loved properties. There's an opportunity to give the guests that and further differentiate our parks from other parks around the world.

We have got another attraction under construction in California and later in Florida that capitalizes on the Pixar franchises, and so you see that spending continue. We think there's a real opportunity to further differentiate ourselves in that regard. That's really what is driving that difference that you cite. Thanks.

Lowell Singer

Rich, thanks. Thank you, everyone again for joining us today. I want to note that a reconciliation of non-GAAP measures referred to on this call to equivalent GAAP measures can be found on our investors relations website.

I also want to remind everyone that certain statements in today's press release and on this call may constitute forward-looking statements under the securities laws. These statements were made on the basis of management's views and assumptions regarding future events and business performance as of the time these statements were made and management does not undertake any obligation to update these statements.

These statements are subject to a number of risks and uncertainties and actual results may differ materially from those expressed or implied in light of a variety of factors, including factors contained in our annual report on Form 10-K and on our other SEC filings.

This concludes today's third quarter call. I hope everyone has a great day.

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